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‘New’ Military Retirement is a Pyramid Scheme

Pentagon Brass, Congress, Military Service lobbying agencies, and the supposed ‘watchdog’ press are all lauding the proposed ‘New’ Military Retirement System that blends the Thrift Savings Plan in with a slightly-reduced ‘cliff-vested’ pension at the completion of a 20-year military career.

Um, have any of you actually read this proposal and done the math?

Since this post might get read by high-ranking officials, I’ll dumb it down for you right now and give you the ‘Bottom Line Up Front’ (BLUF) before doing a deep-dive in to the details.

Point #1 – Is this a good deal for Junior Enlisted? No. The ‘Hybrid’ retirement proposal gives them an IRA rollover check for a whopping $6704 at the end of a typical 5-Year first Enlistment Contract.

Point #2 – Is this a better deal for a 20-year Enlisted Career? No. A Career Soldier/Airman/Sailor/Marine has a shortfall of almost $4k/year in annual income at 20 years of service.

Point #3- Is this a better deal for a 20-year Officer Career? No. A 20-year Officer Career retirement check falls short by $3k per year. (However, if the TSP returns more than 11% per year OR officers save more than 5 percent per year in salary deferrals then the ‘New’ Retirement System is a better deal for Officers).

The military retirement system as it stands today is an ‘All or Nothing’ retirement system where you stay in for 20 years or else get essentially Zero. It’s antiquated and needs to be adjusted. Under the current retirement system, Military servicemembers CAN participate in the TSP but receive no Agency or Matching contributions (the TSP is essentially an IRA with ultra-low-cost index funds).

The ‘New’ Military Retirement (proposal summary is here) throttles back on the 20-year pension payout by 20 percent, but the ‘giveback’ is that they will provide 1% ‘Agency’ (Gratis) TSP contributions and will match TSP contributions up to 5% – But only after the 4th year of an enlistment contract.

So let’s look at the motivation for the ‘New’ Hybrid Military Retirement System.

According to AF Chief of Staff General Mike Welsh, “What we’re worried about is: Don’t reward people who stay less than 20 by hurting people who stay more than 20… We want people still to stay in and serve a career in the Air Force, so the longer you stay, the more benefit the plan should be to you”

Well, based on the math I’d say there’s certainly no danger that we’re severely hurting those who complete a 20-year career. It’s only a minor ding in the New System. However, I’d say that the burden of payment for the new retirement system is borne on the backs of the Junior Enlisted, who make up over half of DoD’s total force.

Here’s my theory – Pentagon Brass (and Congress) can sign-off on the New Retirement System and still look themselves in the mirror in the morning, because it’s no longer an ‘All-or-Nothing’ retirement system. All servicemembers will have something they can rollover to an IRA or convert to a 72(t) check at the end of their service.

When comparing the New Retirement System to FERS (Federal Employee Retirement System), FERS Participation Rate in TSP (as defined by the TSP, federal employees who regularly contribute salary deferrals, ) averages around 85 percent over the last 10 years. Contrast that with present Military TSP participation rate 41%- Which is pretty good participation for the military, considering that servicemembers are not presently incentivized with a TSP ‘Match’.

So the logic goes that most servicemembers – Probably as many as the 85% participating in the FERS TSP – Would participate in the TSP if they were incentivized to do so with Agency and Matching contributions, right?

But that’s the smoke and mirrors part. Congress and the Pentagon are counting on low military TSP participation rates to save money in the ‘New’ Military Retirement System. Congress and DoD are basically planning on running the Military TSP like 24-Hour Fitness runs its business- That is, the DoD will sign you up for the TSP benefit and then hope you never use it. This is where the DoD budget savings will come from.

Why do I think that Military TSP participation rates will be lower than FERS TSP participation rates in the ‘New Military Retirement’?

See, There’s another group of Federal Employees – Covered under CSRS – Who have the identical TSP benefit (no TSP Matching Contributions) available to them as current active duty military. It’s the same TSP system – You can save for retirement in Salary Deferrals, but there is no Uncle Sam TSP Match. But get this – With an identical TSP benefit offered to current military, CSRS participation rate in TSP is almost 20 points higher at 60%, versus Active Duty TSP participation of 41%.

So, when at TSP match is offered under the New System, will military servicemembers participate in TSP salary deferrals like the 85% of FERS employees currently do? Will many service members ‘max out’ their TSP benefit? My prediction is that military participation in TSP will run somewhere between the current CSRS participation of 60% and the current FERS participation of 85%. So unfortunately, my wager (and the Pentagon’s wager) is No.

As promised, Now It’s Math Time.

Case #1 – Junior Enlisted TSP Value at the end of a 5-Year Contract.

There’s all kinds of enlistment contracts varying in length from 4 to 6 years, with starting ranks ranging from E-1 to E-4 (Enlisted Nuke contracts). I’ll keep it simple and go E-1 to E-5 over a 5 year contract. Note that under the current proposal, Junior Enlisted are excluded from TSP Matching Contributions for the first 4 years.

Note that in all 3 examples below I assume that the servicemember participates up to the maximum Uncle Sam TSP Match, and no more. Also note I use 2% Base Pay inflation and 6% TSP Rate of Return for all calculations. As always, I provide the spreadsheet here so you can plug in your own numbers.

In Case #1 Joe or Jane Snuffy/Tentpeg/Schmuckatelli/Gronk has a whopping $6704 available as an IRA Rollover Check at the end of his/her first enlistment contract. Probably less than what s/he would have with a 6% 401(k) match from working at Walmart:

Case #1 – Junior Enlisted TSP Balance at end of 5-yr Contract

Case #2 – Joe or Jane Gronk makes it a 20-year career. Senior Chief Gronk’s annual retirement check will be $3800 thinner under the ‘New’ Military Retirement system at age 40 (note I used 72t.net to annuitize the TSP balance at an annual 3.46% withdrawal rate for a 40-year old):

Case #2 – Enlisted TSP and Retirement Annuity at 20 Years

Case #3 – Mister Roberts rises through the Officer Ranks to become Commander Roberts after 20 years of service. His retirement check shortfall is $3,100 per year at age 40:

Case #3 – Officer TSP and Retirement Pay after 20 years

Note that in the Officer Career Case, it is possible for an Officer to come out ahead under the ‘New’ System with a high (> 10%) TSP return rate, or at higher salary deferral rates (also > 10%).

What to conclude? Overall, there is some potential upside to the New Military Retirement System, but it requires TSP rates of return of over 11% per year (an unreasonable assumption) or servicemember salary deferral rates of over 10 percent.

Considering that 85% of FERS employees contribute to TSP (and therefore 15% of FERS employees presently leave TSP Matching Money on the table), it is unreasonable to assume that 100% of military servicemembers will contribute salary deferrals to TSP.

This is where the Pentagon achieves additional savings with the New Military Retirement System. In addition to reduced pension payouts, the New Military Retirement System is geared to reward TSP savers, yet it denies TSP Matching Contributions to Junior Enlisted – Who make up half of the DoD’s population.

So, make your own conclusion about what the New Military Retirement System looks like…

If I was a midshipmen/cadet/deferred enlistee today and had to sign a paper choosing between the ‘new’ and ‘old’ system, I would STILL choose the NEW system, as it is a hedge against punching out at 7-10 years and having low/no retirement account balance at age 30.

I still think it’s crap that DoD plans on auto-enrolling half the Active Duty Force (junior enlisted) at 3% salary deferrals without matching their contributions for the first four years of enlistment.